If you want to turn thousands into millions, you've got to invest like the best. But you don't have to pay $50,000 a year for an Ivy League education. This lesson is absolutely free -- and could make you rich.
For years, endowment funds at major universities have scoured every nook and cranny, searching for the best places to invest their money. Endowment managers like Yale's David Swensen and Harvard's Jane Mendillo have put together track records of extraordinary performance that compare favorably to Berkshire Hathaway
Investing with trailblazers
Just 10 years ago, investors lived and breathed the stock market. With the run of great years in the 1990s, there wasn't much reason to look beyond U.S. stocks to make money. Furthermore, taking on other types of investing, such as trading commodities futures or investing in real estate partnerships, was complicated and often required separate accounts and specialized investment advice.
But despite the allure of stocks back then, endowments looked for other promising opportunities. For instance, as early as 1999, Yale's endowment managers were investing in real estate, oil and gas properties, and timber. They bought into private equity and hedge funds. They crossed borders and invested in international stocks, which were then out of favor.
Eight years later, Yale's endowment had just 11% allocated to U.S. stocks. Real estate, hedge funds, and private equity investments dwarf its stock holdings. And the majority of its stock investments are in international companies.
Beyond diversification
The success of these large institutional investors has changed the way ordinary investors put their money to work. Although access to hedge funds and direct ownership of commercial real estate is still limited to the wealthy, the rise of real estate investment trusts, as well as exchange-traded funds that focus on commodities, have brought these investments to the masses. Over time, these new asset classes have worked their way into recommended asset allocations.
There's no doubt that diversifying their portfolios have helped endowment funds weather turbulent times. For instance, consider the Yale endowment's 2001 fiscal year. Here's how some of the market's biggest stocks were doing:
|
Stock |
Total Return: |
|---|---|
|
Cisco Systems |
(71.4%) |
|
Microsoft |
(8.8%) |
|
Intel |
(56.2%) |
|
General Electric |
(6.4%) |
|
ExxonMobil |
13.6% |
Source: Yahoo! Finance.
You'd think from these results, and the fact that the S&P as a whole dropped almost 15%, that the endowment had a rough year. But diversity saved Yale's endowment, which rose 9.2% in that year.
Be ahead of the crowd
But the real lesson from the success of endowment funds isn't in diversification for its own sake. Instead, what you can learn from institutions like Yale is that following the crowd won't earn you consistently superior returns. Identifying investment trends early on is what will help you beat benchmarks over time.
What's more, you don't necessarily have to look at exotic investment vehicles to secure a comfortable retirement. In the 1980s, Yale's endowment was primarily invested in U.S. stocks -- which performed very well in the aftermath of stagflation. When stocks are attractively priced, they definitely deserve a substantial place in your portfolio.
Similarly, as other assets like real estate and commodities have become more expensive, you can expect to see endowment funds move on to the next lucrative area.
To make the most of your retirement savings, keep your eyes open for novel and enterprising investment opportunities. You don't need an Ivy League education to retire rich -- just don't invest with the herd.
For more on managing your retirement money, read about:
- Generation X's last, best hope to retire
- Our guidebook to investing in down markets
- The retirement strategy you can set and forget.
